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Monthly Archives: May 2010

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Fitch downgraded Spain’s sovereign rating to AA+, outlook stable. This was after Spain’s parliament cleared by one vote a commitment to fiscal consolidation measures of €15 billion (1.5% of GDP).

Reacting to pressure from the European Stabilization Mechanism, this move aims to reduce Spain’s budget deficit by an extra 0.5 percentage points of GDP in 2010 to 9.3% & one percentage point in 2011 to 6.0%.

All of this is “pie-in-the-sky” nonsense! No one truly believes that politicians will willingly deliver on promises to impose fiscal restraints.

(The only element of truth is that the AAA standard applied to US government debt is so degraded on its face that Spain ridiculously-high rating may be appropriate in a relative sense!)

Democratically-elected officials in Spain (or elsewhere) operate under incentives that encourage them to make decisions that work against long-term financial interests of their citizens.

As such, it is not the nature of the beast, per se, but a matter of whether they adhere to the “Rule of Law”, perhaps expressed in a Constitution that draws “red lines” to constrain actions by organs of government.

Legislators & rulers of democratic governments are operating in a “lawless” manner in trampling the Rule of Law. For example, Euro-zone politicians wantonly violate treaty obligations that set limits on fiscal deficits & public-sector debt.

In the US, there is a certain appeal to a “throw-all-the-bums-out” movement to vote against all incumbents in the upcoming general election. While this may give some momentary satisfaction & instill some fear of voters’ wrath, it will not resolve the fundamental problems,

As it is, legislators are not afraid of being rebuked from constitutional courts that approve expansive interpretations of the powers of legislatures that have also been accompanied by enhanced duties & powers of governments.

“Fear of disorder & love of well-being unconsciously lead democracies to increase the functions of the central government.” Alexis-Charles-Henri Clérel de Tocqueville in a warning that should be heeded by all freedom-loving people!

Politicians with a penchant for expanding government use crises, real or imaged, to fulfill their aims. Other office seekers, unmotivated by ideology but seeking electoral support or facing requests from bureaucrats or threats of public-sector trade unions, act to expand the scope of government. In the end, citizens suddenly find themselves over-burdened by governments that tax too much, spend too much & borrow too much,

Governments under democracy tend to grow beyond wishes of most citizens:

Universidad Francisco Marroquín bears the name of a Spanish humanitarian, Catholic theologian & scholar. Although first ordained as a bishop while living in Mexico, he moved to Guatemala where he promoted the causes of liberty & justice for Native Americans.

As part of his efforts to educate the native people, Francisco Marroquín founded the School of Saint Thomas in 1559, later becoming the University of San Carlos of Guatemala. As a scholar of the K’iche’ language, he published the first catechism in that Indian language.

The acts of Francisco Marroquín in support of liberty, justice & peaceful coexistence among people with contrasting values & cultures are an inspiration for all Americans in all of the Americas.

Rand Paul, a candidate for public office in the US, has drawn considerable criticism for remarks he made concerning his view on the Civil Rights Act of 1964. This landmark legislation outlawed unequal application of voter registration requirements. It also banned racial segregation in schools, at the workplace & “public accommodations” that served the general public.

The “good intentions” behind the Act invite applause, but the qualitative nature of its results are in dispute. While some believe it improved race relations & enhanced freedom, others believe that using force to promote integration led to more racial tensions & curtailed individual liberty.

Among the pernicious unintended consequences of the Act, racial quotas & affirmative action sparked a new sort of racial politics that helped concretize racial identity. And in granting an unprecedented expansion of power to the federal government to oversee employer/employee relations & customer service practices, the Act reduced contract rights & private property.

As in other instances, the expanded role & power of government intervention was based on an interpretation of a Constitutional authority of Congressional regulation of interstate commerce. But the framers of the Constitution seemed to intend this ensure free trade among the states rather than providing a mechanism for unrestrained expansions of the regulation of businesses.

A possible defense for the passage of the Act is that certain groups gained additional rights or access to freedoms that were previously denied. However, it is difficult to support contentions that gains in “group” rights that come at the expense of diminished individual rights lead to net gains to a community.

Even the Queen of England has voiced disquiet about the poisonous effects of too much government spending & unsustainable public-sector debt! Appearing in her full regalia before Parliament, she invoked fiscal responsibility with a focus on spending cuts.

She sees clearly that it is impossible for governments to “create” prosperity or boost economic performance by spending more & more, especially by borrowing that leads to higher debt.

Unfortunately, government officials are ignoring what the Queen has seen. In Greece, they are relying upon a bailout from the IMF & European Union partners while pushing up taxes & government spending in the midst of a deep recession. Consequently, the euro & bourses around the globe have been taking a pounding.

Meanwhile, American policy makers are intent on using the notion of current economic conditions to foist over yet another bogus “stimulus” plan. Once again, they rely upon “tooth fairy” economic arguments that $1 in government spending will lead to a net gain of $1.64 in higher GDP.

While the Queen of Hearts often shouted, “Off with their heads,” a real-life Queen reveals that politicians & economists that believe such nonsense are “out of their minds”!

Why is it that so many economists think it is their duty to assist tax-greedy politicians in getting the “most eggs for least squawking” or the “most bacon with the least squeal” from taxpayers? (Forgive the homely euphemisms that were inspired as was this entry from spending time in the agrarian paradise of the Deep South of the USA!)

One of the worst instances involving the greatest sense of naiveté about political reality concerns economists that support imposing a VAT (value-added tax) on American businesses & consumers.

Economists generally accept that taxing consumption does less economic harm than taxing income. As such, it would be an improvement if income taxes were REPLACED by a tax on consumption.

It is irresponsible & dishonest to imagine that the US federal government would eliminate or reduce income taxes in combination with a VAT.

One “Trojan horse” tactic relating to VAT is to suggest that it would only be a “modest” rate of say 5%. Proposing a low initial rate is a tactic to institute a new tax system that would be continuously gamed by irresponsible & mostly-unaccountable public officials seeking more revenues. As it is, the “painless” nature of a tax being built into prices allows stealth increases in rates as occurred in countries in the European Union where rates moved ever-higher from 10% to an average of nearly 20%.

Economists with a shred of honesty would promote sensible tax reform so that more government-provided goods & services are paid with “user fees” that bring balance to supply & demand.

You may love bacon but a VAT would support the addiction of tax-hungry pols to “pork” that is bad for economic health:

Wonder where all that liquidity has gone that central banks are pumping into system with abusively-low interest rates & why or how that has not caused price levels to rise?

Well, it is creating the mother-of-all-bubbles in the market for government-issued debt!

Never before has so much money been thrown for so long on such bad bets by so many people. At least not since the mortgage-debt bubble created by cheap-credit policies & political perfidy….

Commercial banks are queuing up to borrow from central banks at extremely-low interest rates to then lend to governments at higher rates. All this at with zero risk (supposedly).

In Europe, guarantees are allowing the Greek government to borrow more. In the US, California & the federal government are able to sell more debt as in Japan with its ever-growing mountain of public-sector debt that now towers over its annual GDP.

It appears that the madness will not stop until the public-sector bubble bursts. Stand by for politicians to blame private-sector actors for this gloomy end!

Latin Americans are finding that democracy fails to lead up to its good press. As it is, democracy has brought them a new set of caudillos in Venezuela & Bolivia set to serve as leaders for life.

Most certainly, democracy has not brought the promise of stability or prosperity, except in Chile where it was more consistently mixed with market-friendly economic reforms. By contrast, the destructive nature of Perionist populism overwhelmed attempts to make halfhearted reforms in Argentina.

In Guatemala, politicians behaving like European-style social democrats, shifted the economy into reverse by passing laws to promote collectivism that curb individual liberty & suppress markets.

Responding to excessive corruption, rising poverty & increased insecurity brought about by social democracy, scholars & citizens in Guatemala are seeking radical constitutional reforms. Their aim is to establish the Rule of Law in order to constrain the use of legislative actions that undermine individual freedom. (See ProReforma)

They recognize that this requires equality for all before the law, the absence of privileges for some at the expense of others within a “system of law” rather than a system of legislated laws. The guiding principal of the reformed document is the protection of individual liberty based on preserving rights over lawfully-acquired property.

Politicians often cite principal-agent problems in private-sector operations, like recent misbehavior in the financial sector, as justification for government intervention in the economy. However, political opportunism in such assertions is clearly at play given that the biggest threat to economic & financial stability comes from principal-agent failures in public sector activities.

In particular, public officials seldom act responsibly as agents of taxpayers when it comes to negotiating with workers employed by public sector institutions. As a result, public-sector employees from Greece to California enjoy job guarantees that are seldom found in the private sector.

Of special concern are retirement benefits that allow early retirement and benefit packages that most real taxpayers can only dream about. It is crucial to note that public-sector employees do not pay taxes in a meaningful sense, because there earnings are drawn from a pool of revenues created by burdening private-sector workers. Since workers paid by governments “earn” taxes, they are not net contributors. Indeed, it is a charade to collect taxes from public-sector employees.

Meanwhile, public-sector employees tend to be granted “property rights” to their jobs based on seniority privileges that make them unaccountable to taxpayers that ultimately pay their salaries.

Friedrich Hayek portrayed labor unions as an instrument for “coercion of men by other men” in that some workers could force their fellow workers into arrangements that the latter do not want. This problem is aggravated by allowing public-sector employees to join or form unions that grants them disproportionate power over taxpayers & the citizens they supposedly serve.

On a political level, unions operate just like any other lobbying special interests..They lobby government officials, litigate, advise members on elections and political issues, donate money, buy advertising & make endorsements for political candidates and parties. Indeed, labor unions in the US are perhaps more active in lobbying as in organizing workers or bargaining with employers or engaging in strike actions.